The Essentials of Employment Contracts in a Bad Economy Looking Down the Road at Termination Provisions By: Magdalena Kadziolka When a representative starts a new job, one of the last things on his mind may be what will happen if he loses that job. Representatives who take on a new job in this economic climate should pay close attention to certain provisions in their proposed employment contracts and know the areas where there is room for negotiation. The following provisions are essential to any new employees reviewing an employment contract, but may be of particular interest to individuals who work in financial services: 1. Termination of Employment by the Firm – “At Will” Employment Many brokerage firms will specify that a representative may be terminated “without cause” or that the representative’s relationship with the employer is “at will.” Essentially, the firm is telling the representative that he can be fired for no reason at all, at any time. Although most states are “at will” employment states, a representative can try to negotiate some degree of protection within this clause. First, the representative can request notice from the firm – that if the firm chooses to terminate the representative without cause, it must provide the representative with a few weeks’ notice or pay in lieu of such notice. Next, the representative may try to negotiate the enforceability of a non-compete clause (if one exists within the employment contract) if he is terminated without cause. In New York, for example, some courts have ruled that a non-compete clause is not enforceable if the representative was terminated without cause – representatives in New York may be able to negotiate the outright removal of any non-compete restrictions if a without cause termination takes place. Otherwise, representatives may also try to negotiate the scope of the non-compete clause if a without cause termination takes place by negotiating a less restrictive limitation on the geographic or temporal scope of the non-compete clause. Finally, the representative should be aware that although a firm may have the right to terminate a representative “at will,” federal provisions and state laws carve out exceptions to this general rule for certain types of discrimination or violations of public policy. Although these exceptions will apply even if they are not written into the original employment agreement, a representative may wish to include a provision that acknowledges that an employer is prohibited from terminating a representative in certain cases. 2. Termination of Employment by the Firm – “For Cause” Termination Brokerage firms may include a provision that specifies that the representative may be terminated “for cause,” which essentially means for some wrongdoing on the representative’s part. Representatives may wish to negotiate some additional provisions to elaborate on what constitutes “cause.” First, the representative may negotiate a definition of what would constitute “for cause” termination, to eliminate a potentially overly broad definition that would give the firm broader authority to terminate the representative under this provision. Failure to substantially perform a representative’s duties or responsibilities under the employment contract, a conviction or plea of guilty to a misdemeanor or felony, any serious act of misconduct of moral turpitude, or a material breach of any of the provisions in a representative manual are some examples of the situations which may give rise to a “for cause” termination. Representatives may try to negotiate the opportunity to remedy the reason for “for cause” termination within a specific amount of time after the firm gives the representative notice that it is considering terminating the representative “for cause.” This may give representatives who are short of performance standards one last chance to perform to the firm’s expectations or to meet certain production requirements. Finally, representatives should be aware that a termination “for cause” may trigger other provisions within the employment contract, such as those concerning benefits, bonuses, deferred compensation or other provisions offered by the employer. Representatives should read through those provisions to determine how, if at all, they are affected by “for cause” terminations. 3. Termination of Employment by the Firm – Death or Disability Brokerage firms will likely include a clause specifying that the employment agreement terminates upon the death or total disability of the representative. A representative may wish to negotiate a provision which grants his heirs/estate a pro rata share of any bonus payments owed to the representative and, of course, that any salary, commissions, fees, etc. earned up to the date of his death be paid out. The more essential provision concerns the definition of “total disability.” The representative should note whether the agreement includes a definition of this term. The representative may wish to negotiate a provision that he should continue to receive his salary for a specific period of time, even in the event of disability. The brokerage firm will certainly want to impose a lower temporal threshold. The representative should also be sure that the firm provides the representative a “reasonable accommodation” to assist the representative in performing his duties under the employment agreement. The brokerage firm may wish to include a provision that states, “Representative’s employment shall be deemed to have been terminated by Representative upon Representative’s inability to perform Representative’s duties under Agreement, even with reasonable accommodation, for more than twenty-four weeks (24), whether or not consecutive, in any twelve-month period.” 4. Termination of Employment by the Firm – Severance A representative should negotiate a provision which provides a severance payment to him in the event of a termination “without cause” or a resignation for “good reason.” Brokerage firms will likely be unwilling to negotiate payment of severance for a relatively new representative, so the representative should be aware that severance payments may not become available until six months to a year after he commences employment with the firm. The representative may try to negotiate a scale for severance payments (two months of severance for every year of employment, as an example) or may try to set a specific number of months severance in any event (six months, for example). The representative may also wish to negotiate the payment of a portion of his bonus within the severance provision. Within this provision, the continuation of benefits, such as health benefits under COBRA, may be included as something that the employer pays on behalf of the representative for a specific amount of time. A brokerage firm will likely require a representative to sign a release of all potential claims against the employer in exchange for severance payments, and this may appear within the employment contract. The representative should keep this in mind if faced with the decision of whether or not to accept a severance payment down the road. 5. Termination of Employment by the Representative – “Good Reason” A brokerage firm may wish to address a representative’s ability to resign by requiring that the representative provide “good reason” for his resignation. Without “good reason,” the firm may penalize the representative by placing him on administrative leave or by withholding or terminating the aforementioned benefits, bonuses, deferred compensation, etc. “Good reason” may include a merger, consolidation, sale, buyout or asset sale of the firm, the firm’s material failure to perform under the employment contract, or the representative’s relocation, without his consent, to more than a specific number of miles from his employment. It is in a representative’s interest to include broader provisions within the “good reason” definition. A representative may also wish to negotiate down the number of days notice he is required to provide to the firm if he wishes to resign (with or without “good reason”). 6. Covenants Not to Compete Non-compete clauses, also called restrictive covenants, covenants not to compete or nonsolicitation clauses, are often found in contracts for individuals who work in the financial services industry – indeed, they can pop up in almost any industry. The purpose of the noncompete clause may be to help a brokerage firm to prevent former representatives from disclosing its trade secrets or other confidential information to its competitors. The validity of a non-compete agreement will vary by jurisdiction. To determine which state’s law applies, first check the employment agreement itself. Often employment agreements will specify the law of a particular state chosen to govern everything arising under the contract. If the contract does not contain this provision, the law of the state where the contract was executed or the law of the state in which the contract services were performed may govern. Some states prohibit non-compete clauses with a few narrow exceptions, but others permit enforcement of reasonable non-compete clauses. A competent attorney can advise a representative as to which states permit non-compete clauses and to which extent. Non-compete clauses are present outside of employment agreements as well – even if an individual is an independent contractor, a non-compete clause may be present in his agreement with the brokerage firm, and these principles will also apply. Where permitted, non-compete clauses will generally be enforceable only if they are reasonable as to the temporal and geographic scope. The geographic scope of a non-compete clause must be reasonable, which will vary based on each case, but may depend on the scope of the representative’s employment or affiliation or the firm’s protectable interest. A representative may try to negotiate a smaller geographic scope that will allow him to find employment elsewhere without having to move a long distance from his previous place of employment. Likewise, the representative should try to negotiate the temporal scope to lower the amount of time the representative will be restricted by the non-compete. The representative may also be able to negotiate the type of activity prohibited by a non-compete – this may include working for specific competitors, contacting the employer’s clients or representatives or working in competition with the company in a narrow field of the financial services industry, rather than the industry as a whole. The representative should try to narrow the scope of the non-compete to enable him to find alternative employment in the event that his employment is terminated. Conclusion With these essential provisions in mind, a representative can face the difficult task of negotiating with a brokerage firm with his future in mind. Of course, the advice of competent counsel ensures that a representative is aware of all of the potential pitfalls of employment contract negotiation, and a representative who has any questions concerning an employment contract should retain counsel for specific advice based on his particular circumstances. The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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